Customer concentration

Concentration is one of the first things a factor calculates from an accounts receivable aging report, and it is a common reason a business receives less funding than the headline advance rate suggests.

The measure is simple. The consequences are not. A company can have creditworthy customers, clean invoices, and current tax filings and still see availability reduced because too much of the ledger depends on one account.

Key takeaways

• Concentration measures dependence on a single customer, not that customer's credit quality.
• It is generally calculated by account debtor across all open invoices.
• The OCC's bank-supervisory handbook uses 10% of total receivables as a concentration threshold and discusses tighter borrowing-base treatment. Individual factors set their own limits.
• A factor may cap the concentrated account, reduce the advance on the excess, or exclude the portion above the limit.
• Concentration limits and account-debtor credit limits are separate constraints, and both can apply.
• Reducing concentration generally requires adding customers rather than reorganizing paperwork.

Why concentration matters

The risk is not only that the customer fails to pay. It is that the customer represents so much of the business that any disruption becomes material.

The OCC's Comptroller's Handbook on accounts receivable and inventory financing describes this as single-party risk. If that customer moves its business elsewhere or its financial condition deteriorates, the borrower's business can be compromised, especially when the borrower cannot diversify.[1]

The same reasoning applies to a factoring facility. A ledger built around one account carries the customer's payment behavior, dispute practices, contract terms, and continued business relationship as a single point of failure.

How concentration limits are applied

The OCC handbook says banks normally consider a single account representing 10% or more of the receivables portfolio to be concentrated. It also discusses limiting concentrated accounts to 10% to 20% of the receivables borrowing base or reducing the percentage advanced against those accounts.[1]

That is bank-supervisory guidance, not a universal factoring rule. A specific factor sets its own limit, which may be higher or lower depending on the customer's credit quality, the company's industry, payment history, and the rest of the facility.

Common approaches include:

• A cap expressed as a percentage of eligible receivables, with the excess excluded
• A reduced advance against the concentrated portion
• A separate account-debtor credit limit that produces a similar result

Read which method the agreement uses. The same ledger can produce different availability under each structure.

Concentration is separate from the credit limit

A factor can approve an account debtor, assign it a credit limit, and still restrict how much of the facility may depend on that customer.

Approval addresses whether the customer is acceptable for funding. The concentration limit addresses how much of the company's eligible receivables the factor is willing to tie to one payment source.

Both can apply at the same time. The more restrictive limit controls.

Real-world example

A staffing agency has $400,000 in open receivables. The staffing factoring guide explains how concentration limits interact with payroll timing and customer approval in temp staffing. One national account owes $280,000, and the remaining $120,000 is spread across six customers.

Assume the agreement allows no more than $100,000 of eligible receivables from any single account debtor. The remaining $180,000 owed by the national account would be excluded.

Before applying the advance rate or any other eligibility rule, the eligible ledger would be $220,000 rather than $400,000.

The customer's credit quality did not change the result. The limit reflects the staffing agency's dependence on one account.

Reducing concentration

If the aging report is accurate, documentation alone does not eliminate real customer concentration. The remedies are mainly commercial:

• Add customers, including smaller accounts that broaden the base
• Avoid directing a growing share of capacity to the same customer
• Confirm whether related entities are treated as separate account debtors or one common exposure
• Discuss the concentration with the factor early, especially when it is expected to decline over time

A concentrated ledger is common in young companies and in industries where one contract can double headcount. Disclosing it at the start produces a more realistic structure than discovering it during underwriting.

Common misconception: concentration is only a credit question

It is also a structural question.

A financially strong customer can still create excessive concentration because the factor is measuring the company's dependence on that payment source, not only the customer's balance sheet.

Sources

1. Office of the Comptroller of the Currency, Comptroller's Handbook: Accounts Receivable and Inventory Financing
2. Uniform Commercial Code § 9-102